Canaccord Genuity has upgraded its view Anglo-Turkish oil firm Genel Energy (LON:GENL) as Kurdistan pushes ahead with plans to export crude oil via a new pipeline into Turkey.
“A flurry of high level discussions and diplomacy between Erbil, Ankara, and Baghdad, has provided significant positive impetus to the tricky question of pipeline oil exports from the Kurdistan Region of Iraq (KRI),” analyst Charlie Sharp.
Contractors such as Genel would be paid their fees on production upfront, according to proposals, whilst the remainder of the revenues would be held in escrow whilst an agreement on oil sales and royalties is reached between Kurdistan authorities and Baghdad.
Whilst acknowledging that it situation relies upon a “complex political dynamic”, the analyst explains: “These proposals certainly indicate Ankara’s and Erbil’s determination to push ahead with crude pipeline exports from KRI as soon as possible, and we think that the proposals do represent substantial steps towards a solution to the revenue payment mechanism for pipeline exported oil from KRG.
“They do not yet clarify all the details of how revenues would flow to Genel, but the framework appears to look reasonable – at least to external observers.”
“We still recognise the uncertainties related to the operations and the payment mechanism, but we think that recent operational advances on the ground and steps towards a revenue payment solution do represent a diminution of the risk profile.”
The broker increases its recommendation to ‘buy’ from ‘hold’, and increases the target price to £12.40 from £11.00.
This target, whilst differing in sentiment, isn’t many miles from Investec’s £11.40 target which accompanied the broker’s downgrade – to ‘hold’ from ‘buy’ – on Tuesday.
Kurdistan’s emerging oil and gas industry has reached an inflection point, with the completion of a regional pipeline and as exports are now imminent, according to Investec. Analyst Brian Gallagher said there had been a de-risking of regional valuations, and now the market is beginning to consider the possibility of mergers and acquisitions.
Nevertheless, he also said: “Genel’s valuation has also reached an inflexion point. A full unwind of discount rates under 10% is not a realistic scenario at this juncture in our view.”
“Even if Kurdish crude can be exported to international markets, it is still located onshore in arguably the most heterogeneous ethnic and political region in the world and this must be factored into the Genel valuation.”
Genel isn’t the only possible beneficiary of the market opening for Kurdish oil exports, and also today Cannacord’s Charlie Sharp also run the rule over Gulf Keystone Petroleum (LON:GKP).
For the time being, however, the analyst retains a ‘hold’ recommendation on this Kurdistan oil firm and at the same time the price target is downgraded to 200p per share, because of higher levels of debt and lower than expected production growth.
The news that Excalibur will not appeal its recent court defeat to GKP is a positive though, he said.
“GKP is in transition from exploration to production, a process that typically is bumpy and provides limited high impact newsflow. Shaikan production growth has been slower than expected – due to operational and marketing issues - and it is unclear when those will be resolved to allow some consistency of production at/close to the two production facilities capacity.”
“This is a difficult phase for the company, and the uncertainties lead us to be cautious on the near term share price performance.”